More Medicare Follies

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Facing Facts Alert 18

FACING FACTS The Truth about Entitlements and the Budget A Fax Alert from The Concord Coalition Volume II (Number 6. June 10, 1996) MORE MEDICARE FOLLIES The new Medicare Trustees' report once again brings home how out of kilter the whole system is. Rather than try to solve the problem, the administration would hide it by reallocating Medicare expenditures from the Hospital Insurance (HI) trust fund, which by law must be solvent to pay benefits, to Medicare's Supplementary Medical Insurance (SMI) program, where general revenues will automatically plug any funding gap, no matter how large. There, presumably, the spending will vanish in the sea of other budgetary red ink. The Republicans are to be commended for their greater honesty: Their proposed savings would actually come from restraining spending. Still, not even the GOP dares to acknowledge the full magnitude of Medicare's funding shortfall and come clean with the public about how much must be saved to "save" the program. The Real Bottom Line First of all, the GOP plan would merely extend the solvency of the HI trust fund for about five years beyond the 2001 bankruptcy date announced by Medicare's Trustees. In the context of a program that makes benefit promises spanning a lifetime, and whose official definition of solvency is trust-fund balance over 75 years, this improvement seems underwhelming. Moreover, even over the near-term, the GOP plan -- though more responsible than the administration plan -- falls far short of the HI savings that are required to keep this "self-financing" program from adding to the federal deficit. As we have argued in other alerts, the only economically sensible way to look at Medicare is to jettison the metaphysics of trust-fund accounting, which allows politicians to count the system's paper assets as genuine savings, and to look instead at Medicare's operating balance -- that is, the annual difference between its outlays and earmarked tax revenues. Looked at on a cash basis, HI is already running an annual deficit of $17 billion, a shortfall that will rise to $41 billion by 2000, the last year the program is officially projected to be solvent. Over the next six years, HI's cash deficits will total a cumulative $230 billion. This figure represents the HI savings that Congress must find (either by cutting benefits or by raising taxes) to keep HI from adding to the overall federal deficit. Logically, we would also want to include SMI in this calculation, since it too affects the federal budget balance. Remember: SMI's earmarked revenues (which consist of beneficiary premiums) now amount to only one-quarter of SMI costs. The remainder is filled in by a direct Treasury subsidy. A sensible test of the financial stability of SMI is whether its Treasury subsidy will remain constant as a share of GDP. This test shows that, under current law, SMI will have a cumulative cash shortfall of $100 billion over the next six years. All told, Medicare's projected cash shortfall is thus $330 billion -- twice what the GOP would save in HI and SMI and nearly three times what the administration would save. These figures, of course, refer to the budget debate's myopic six-year time horizon. They say nothing about the vast sums we would need to save to stabilize Medicare when the Baby Boom retires. To get an idea of just how large these sums are, consider that even the "draconian" GOP plan would still leave Medicare on track to double as a share of GDP by 2025. Trust-Fund End Game Asked whether Medicare's uncertain fiscal outlook means that beneficiaries might face fewer services or higher costs, HHS Secretary Donna Shalala says "Absolutely not." Perhaps the administration is on to something. By shifting $55 billion in home health care spending out of HI, it would extend the solvency of the HI trust fund by roughly as many years as the GOP would while cutting roughly 40 percent less in HI spending. Why not push this reasoning to its logical conclusion? Why not shift enough spending out of HI to balance its trust fund indefinitely? After all, "saving Medicare for generations to come" makes a better sound bite than saving it for the next ten years -- especially if you can do so without revealing how much future generations will have to pay for today's courageous deed.